Articles from January 2013

The US economy shrank 0.1% in the fourth quarter of 2012 for the first time since the end of the recession in 2009.If you contrast the contraction of 0.1% against the 3.1% growth in the third quarter then you can get some grasp of the sharpness of the fall and the surprise in the data.

The fall in GDP is being attributed to steep cuts in defence spending and weather related hits to consumer activity.

The FOMC in their monthly interest rate meeting were fairly upbeat about the US economy and suggested that the stall in growth was temporary as they left their $85 billion bond buying stimulus plan in place.

The US Dollar has continued to lose ground in the forex markets and the euro has now hit a 14 month high against the USD.

Interestingly the weak data which would normally lead to USD strength as a safe haven instead led to Euro gains.

Elsewhere we have actually had some good news for a change from the UK economy with GfK January consumer confidence coming in at an improved -26 against an expected -28, not quite a surge in optimism but at least ahead of expectations.

The euro has held good levels after mixed economic data with weak German retail sales and lower French Producer Prices countered by a fall in German unemployment.

In other news, the credit ratings agency S&P have noted that China amongst others may be spending too much after they ranked economies on their vulnerability to an investment led collapse.

China is accompanied by Brazil, Australia and South Africa who have invested heavily in recent years to supply China with natural resources.

The US dollar has lost some ground after data releases overnight even though the corporate earnings data from the US was positive.US house prices came in better than expected as well, however the markets seem to be trading the negative consumer sentiment in the US.

US consumer sentiment came in at 58.6 though they expected the figure to be closer to 64.0.

Risk appetite seems to be back on, ever so slightly, as investors are cautious ahead of the FOMC meeting where the Federal Reserve are expected to outline interest rates and stimulus packages, though it is widely expected that they will continue to buy assets until next year.

We also expect US GDP data which is out before the meeting, which would provide a more clear direction to the markets.

From Europe, German consumer confidence data, which seems to be on a high in the new year, has propped up the euro to an 11 month high against the Greenback as it currently is trading over the 1.35 level.

Spain’s recession has deepened more than expected as per estimates in the fourth quarter as the government struggles to rein in the euro region’s second-largest budget deficit.

In the 3 months to December, GDP fell 0.7% as the European Commission has signaled that it may recommend easing Spain’s budget goals as unemployment in Spain creeps to it’s highest level.

A weak USD has seen the Pound recover, albeit temporarily, back up to 1.5750 after it reached a 5 month low yesterday to 1.5675.

However, UK growth concerns continue to build pressure on Sterling.

Though the BOE issued a statement saying the economy may not reach growth levels of 2% for another 3 years but in the long term, they remain optimistic that the economy should return to earlier growth levels.

The comments, not backed by any form of data fails to instil any confidence in the markets as the pound could face further weakness in the first half of the year.

Consumer confidence in Germany will increase in February from a 7-month low, suggests the GFK survey.The survey stated 5.8 marginally above expectations of 5.7 and better than January’s revised 5.7 survey result.

The news will come at a good time as the German economy has been feeling the brunt of the European debt crisis and only grew 0.7% in 2012, down from 3.0% growth in 2011.

The European Central Bank has predicted that the eurozone economy will start its recovery later this year, which should support activity in Europe’s largest economy.

A jump in German GDP growth would lead to a Euro rally. Despite the news, the Euro has not moved significantly and instead fell below 1.3450 in trading against the Greenback. EUR/USD set a new 11-month high in Forex trading on Friday at 1.3479, which may now provide resistance.

As we look to the rest of this week it’s hectic in terms of US data releases keep investors entertained however there should be little to harm the optimistic attitude to risk over coming days.

After Wednesday’s fall in unemployment, last Friday’s GDP figure from the U.K. confirmed what most investors and analysts feared- that the U.K. economy had contracted in the fourth quarter of 2012 meaning the country is edging ever closer to a triple dip recession.With David Cameron’s almost backtrack on an E.U. In/Out referendum Sterling had a difficult week with GBP/EUR falling to over a 10 month low to finish below 1.18.

The GBP/USD also hit fresh lows to strike below 1.58 for the first time since August, while EUR/USD continues to push higher as it starts to test the 1.35 level and is trading at 10 month highs.

We also saw continued weakness for JPY after the newly inducted PM the JCB said they will start further easing at the earliest in 2014.

Looking ahead for the week, a quiet week data wise after the IMF downgraded the outlook for the U.K. economy to negative.

On Wednesday, mortgage approvals will be a watched figure to gauge if the U.K. housing market is picking up with Nationwide HPI expected to show a minimal amount of growth in house values of 0.2%. Friday’s manufacturing PMI is expected the show growth in the UK housing industry.

In the US today we see Durable goods orders expected to show minimal growth of around 0.7% from 1.6%.

On Tuesday we have US Consumer Confidence expecting a slight fall.

Wednesday witnesses US GDP preliminary data before the important Interest rate decision and press conference with any news about ending QE3 early likely to provide significant talking points.

Thursday’s initial and continuing jobless claims expected to rise as Christmas hires are turned away again. Friday is the most important number for the week the Non-farm Payroll, expected to remain on hold as last month around 155k new jobs with ISM Manufacturing also expecting slight fall but still growth.

This morning sees the release of the preliminary 4Q GDP number in the UK at 9.30am. Its fair to say the market is not expecting a surprise to the upside, with Sterling breaching new lows against the Dollar and Euro in the Asian session overnight.

However with the market so oversold if the GDP number does read significantly higher than consensus expectations you sense there is room for a 60-70 pip rally in the Pound.

But it’s a big if given the picture painted by recent data flow. It is the key data point today and will set the tone for Sterling trading for the next few days, whatever the number this morning.

In Europe this morning, and probably adding to Sterling’s woes, the ECB releases data for the early repayment of the 3-year LTRO money.

The news that major banks are paying back LTRO money early is very euro positive, at least in the near term since it marks a major turning point the euro crisis and reaffirms the recent mutterings of EU officials that the worst of the crisis is over.

Whether or not that is the case remains to be seen, but the currency markets will certainly lap up the positive sentiment should it be revealed at large number of banks repay money ahead of schedule.

US data is light on the ground today but new home sales are released later and are expected to show strong growth and continue to indicate a generalised pick up in the US housing sector. A very positive development indeed.

The US House of Representatives yesterday passed a bill that gives a short term extension of federal borrowing authority and the senate is expected to follow suit in the coming days.This pushes back the decision until mid July and in the short term clears the risk of debt default for now.

This should help to keep the momentum into risk firm which will also be boosted by Chinese flash HSBC PMI which rose in January and confirms the fifth consecutive month of expansionary PMI.

However a larger swing into risk is being tempered by news that North Korea will conduct a nuclear test ‘targeted’ at the US following further sanctions.

This has seen EUR/USD so far capped at 1.3350- a level which it has been unable to push cleanly beyond this over the last few days.

On Friday eurozone banks will have the option to re-pay part of the LTRO drawn from the ECB.

According to Deutsche bank this could be euro positive and could provide the momentum for a push up to 1.35 on EUR/USD.

Economic data today is dominated by PMI numbers- so far we have seen a very poor French PMI and a good German PMI which has led to some volatility in EUR/USD.

We have also seen Spanish Q4 unemployment come in at a whopping 26.02%. Later today we have jobless claims from the US.

Investors in Europe continue to remain optimistic on the shared currency as more positive data was out yesterday.The currency still trades above the 1.33 mark against the Greenback after a successful Spanish bond auction, with bond yields dropping to 5.8% on 5 year government bonds coupled with a positive German ZEW economic sentiment number.

Mario Draghi, in his speech yesterday was upbeat that the worst is over for Europe, citing that the ‘darkest clouds’ have receded, as economic sentiment reached its highest level in over 2 years.

While the ECB expects the eurozone to contract by 0.3% in 2013, a gradual recovery is on the cards in the latter half of the year.

The Japanese Yen rose for the third day in a row against the US dollar, as US existing home sales unexpectedly dropped in December restrained by weak supply.

The BOJ has placed it’s inflation target at 2% yesterday and announced open ended asset purchases to commence in 2014.

The S&P 500 hit a fresh five year closing high, even though the US debt ceiling talks are the major point of concern for the global economy.

Meanwhile in the UK, economic data news goes from bad to worse, as figures revealed yesterday that government borrowing jumped again in December despite George Osborne’s efforts to bring it down.

ONS figures show that the deficit came in at £15.4 billion, up 3.8% as compared to the same month last year.This further fuels fears of a downgrade for the UK from it’s AAA rating.

The main focus in the region though is PM David Cameron’s EU referendum speech, where he is going to pledge that if elected for another term, he will let the public vote on whether to stay in or leave the European Union.

Sterling fell to its lowest level since early last year, with additional falls expected in coming days from certain commentators in the city.The Pound dipped to €1.1875 during yesterday’s trading, its weakest level against the single European currency since March 2012 and has nose dived from a peak of €1.2879 last summer.

It was a similar story against the US Dollar as the Pound touched 1.5829 this morning from 1.6379 at the beginning of 2013.

A weaker Sterling is expected to boost inflation, with the official consumer prices index (CPI) appearing fixed at 2.7 per cent. CPI has remained above the Bank of England’s two per cent target for over three years.

The market will now switch all attention to Friday’s first estimation of Britain’s GDP for Q4 last year. Any shrinkage in the economy could signal the start of a technical triple-dip recession – and consequently place further downward pressure on the pound.

Overnight the Bank of Japan declared a major reform in its policy stance, adopting a target to attain a 2% rise in consumer prices and saying it will now conduct asset purchases on an “open-ended” effort to boost its monetary stimulus.

Both decisions had been widely expected and came as a result of intense pressure from the newly elected government of Prime Minister Shinzo Abe for the central bank to act more purposely to support growth and end an era of deflation.

As we look to the rest of this week, we have the US who reopen today following Martin Luther King Day but expect a quiet week in terms of headline data.

Today in Europe we have the German ZEW survey which could provide a further boost to the Euro which currently trades at 1.3280 against the Greenback.

For the UK we have the Bank of England minutes tomorrow, which comes ahead of the Q4 GDP estimate on Friday morning.

As HMV and Jessops called in the administrators last week they capped off another uneventful and disappointing weekly session for Sterling.Friday’s retail sales did nothing to quell the continuing bad news from the U.K. with the figure coming in at a -0.1% rather than minimal growth.

This sent Sterling into another downward spiral with the US Initial Jobless Claims continuing to fall.

The GBP/EUR has been testing 1.19 with the Euro continuing to strengthen against the Dollar but falling short of 1.34 and GBP/USD finished last week below 1.59 after a tough week for Sterling .

As David Cameron looks set to announce a referendum about the U.K.’s involvement in the E.U. Sterling will have another difficult week ahead.

With Wednesday’s unemployment count look set to increase to buck recent trends, especially in the aftermath of a difficult trading during festive season.

Friday’s preliminary GDP data is expected to show that the U.K. contracted again after the last Quarter’s shock growth, bringing the possibility of a triple dip recession, and a credit downgrade from the coveted AAA rating currently held, back to the fore.

On the other side of the pond, after better than expected data last week, in the US and China, the US Dollar will look to continue march forward against Sterling and Yen with Tuesday’s release of existing home sales, expected to show another increase to 5.10m sales last month.

On Friday the New Home Sales is expected to show more growth as the nation’s housing market looks set to continue improving into 2013.

In euroland, the euro will look to see if it can continue its steady rise back to stability this week after battering Sterling to the low 1.19’s last week and testing the 1.34 level against the US Dollar.

On Tuesday we have German ZEW Economic Sentiment and ECB president Mario Draghi speaking with Thursday French and German PMI data and finishing a busy economic week on Friday with German IFO Business Climate.

Industrial output in the eurozone has fallen, in the latest sign that the region’s economy ended 2012 in recession.Figures showed that the euro area industrial output dropped by 0.3% in November, following a 1% fall in October.

The almighty Germany saw its economy contracting by a larger than expected 0.5% in the final quarter of 2012, bringing German economic growth to 0.7% in 2012. This is down from from 3.0% in 2011.

However, public spending saw a surplus in 2012 for the first time in five years. Inflation in Germany hit 2.1% for the month of December and 2% as an average for 2012.

The numbers sit in line with the eurozone’s 2.2% figure for December and follow last week’s comments from the European Central Bank which suggested a rate cut is unlikely, which is contributing to the resurgence of the Euro.

In the UK, figures revealed that consumer prices rose 2.7% from last year earlier.The inflation figures remained above the Bank of England’s target of 2%.

This reading was the highest since May last year as analysts attributed it to rising energy and gas bills.

As the UK tries desperately to meander through its weak economic scenario, there are also concerns to the AAA credit rating, if growth as expected slows in the first quarter.

Last week was a brutal one on the British high street. HMV and Blockbuster joined Jessops & Comet in administration, putting thousands of jobs at risk. Retail sales fell by 0.1% in the busiest shopping month of the year, the office for National Statistics has said.

Over in the USA- debt ceiling discussions continued in a busy trading week. The ongoing talks prompted a decline in the S&P 500 as US stocks continued to slide.

In what is becoming a far too familiar story, President Barack Obama rejected any negotiations with the Republicans over raising the borrowing limit for the US accusing them of trying to ‘extract a ransom’ which threatens to ruin the economy.

Data wise, manufacturing contracted for a sixth month in the region, however retail sales provided some cheer as it increased by 0.5%.

The Fed beige Book showed that the US economy had expanded modestly in December, driven mainly by housing and car sales.

Other figures released saw initial jobless claims in the US dropped more than expected, from 372,000 to 335,000, beating consensus of 365,000- while continuing claims rose to 3,214,000. US housing starts rose from 851,000 to 954,000.